Section 68 Inapplicable to Genuine Trade Payables — Pune ITAT Upholds ₹1.50 Crore Addition Deletion in India Kawasaki Motors Private Limited vs DCIT
Overview of the Case
The Income Tax Appellate Tribunal, Pune Bench, recently delivered a significant ruling in India Kawasaki Motors Private Limited Vs DCIT (ITAT Pune), addressing two critical issues — the wrongful invocation of Section 68 of the Income Tax Act, 1961 against genuine trade payables, and the treatment of a GST refund-related mismatch under Section 143(1)(a). The Tribunal's ruling reinforces a well-established legal principle: trade payables arising from authentic purchase transactions cannot be brought within the ambit of unexplained cash credits under Section 68.
Background and Factual Matrix
India Kawasaki Motors Private Limited is a wholly owned subsidiary of Kawasaki Motors Limited, Japan. The company is engaged in the manufacturing of motorcycles and the assembly of spare parts and components. For Assessment Year 2021-22, the assessee filed its return of income electronically on 11-03-2022, declaring a business loss of Rs. 6,83,00,490/-.
CPC Adjustment Under Section 143(1)
The Centralized Processing Centre ("CPC") issued an intimation order under Section 143(1) of the Act dated 24-05-2022, proposing an upward adjustment of Rs. 1,80,08,945/- on account of a mismatch between the Tax Audit Report (TAR) in Form 3CD and the return of income. This reduced the assessee's declared business loss to Rs. 5,02,91,545/-. The mismatch related to a GST refund reported under clause 16(b) of the TAR.
Scrutiny Assessment and Section 68 Addition
The case was subsequently selected for scrutiny assessment. The Assessing Officer ("AO") made a reference under Section 92CA(1) to the Transfer Pricing Officer ("TPO"). After examining the international transactions, the TPO passed an order under Section 92CA(3) on 31-10-2023 without making any transfer pricing adjustment.
Thereafter, a show cause notice was issued by the AO on 23-11-2023, proposing additions under Section 68 in relation to trade payables. The assessee responded on 04-12-2023, followed by a video conference on 06-12-2023, and subsequently submitted detailed replies. Despite these submissions, the AO finalized the assessment by adding Rs. 1,50,14,517/- under Section 68 on account of trade payables, while also retaining the CPC's adjustment of Rs. 1,80,08,945/-, resulting in a demand of Rs. 1,57,01,030/- vide order dated 20-12-2023 passed under Section 143(3) read with Section 144B of the Act.
The Section 68 Addition: Breakdown of Trade Payables
The AO's addition of Rs. 1,50,14,517/- was comprised of two components:
- Rs. 1,33,08,990/- — relating to differences in balances with Kawasaki Heavy Industries Limited
- Rs. 17,05,527/- — relating to differences in balances with UNO Minda Ltd.
The AO's basis for invoking Section 68 rested on:
- Differences observed between the assessee's books and the confirmations received from parties
- Non-compliance with notices issued under
Section 133(6) - Absence of stamped and signed reconciliation statements
Proceedings Before CIT(A)
Relief on Section 68 Addition
The CIT(A) granted full relief to the assessee on the Section 68 issue, directing deletion of the entire addition of Rs. 1,50,14,517/-. The CIT(A)'s reasoning, reproduced in the Tribunal order, was as follows: